What happened
Shares of motion control motor and power transmission company Altra Industrial Motion (AIMC) rose 10.2% in December, according to data from S&P Global Market Intelligence. It's not so much that the company itself delivered, or was the recipient of, any positive stock-specific news. However, there is a growing sense of optimism -- supported by some data points and company results and guidance -- that the industrial sector could be set to trough sometime in the middle of 2020 and trend upward from then.
Bears and bulls are likely to have a big fight over Altra Industrial Motion stock in 2020. Image source: Getty Images.
Altra is interesting because its valuation is so cheap. The stock currently trades at just 13.4 times analyst earnings projections for 2020. Merely meeting earnings expectations could lead to a stock price appreciation.
On the other hand, the near-term trends in its end markets are negative. For example, management started its fiscal 2019 expecting diluted EPS in the range of $3.02-$3.18, only to reduce guidance to $2.81-$2.97 on the second-quarter earnings release in July, and then $2.77-$2.83 on the third-quarter earnings call in October.
In a nutshell, the company has suffered, alongside many other industrials, from the slowdown in short cycle spending in the industrial sector --- seen here in the survey data from the Institute for Supply Management (ISM) Purchasing Managers Index. A reading below 50 implies a contraction in the industrial economy.
US ISM Manufacturing PMI data by YCharts
That said, some of the most cyclical industrial companies, such as Germany's Siemens (SIEGY -0.94%) and motion control company Parker-Hannifin (PH -0.64%), have given earnings and guidance that suggest a bottoming out could occur in 2020, and this could be a good year to be buying industrial stocks as a consequence. Meanwhile, the sales figures from a highly economically sensitive company like industrial supplier Fastenal (FAST 0.10%) also suggest a bottoming-out process could be in progress.
Data source: Fastenal presentations.
Throw in the possibility of an easing of trade tensions with China, and there's reason for cautious optimism regarding the industrial sector in 2020.
So what
For now, the idea that the second half of 2020 will signal an upturn is merely conjecture, and it's worth noting that the ISM data remains weak and Europe remains in an anemic growth mode. So don't be surprised if there's more negative news to come in the near term, especially from a company like Altra Industrial, which sells into some highly cyclical end markets such transportation (heavy trucks), factory automation, materials handling, and mining.
Now what
It's likely to be a volatile year for investors in Altra Industrial Motion, and also one with a keenly fought-over bear and bull battleground. The bears will point to near-term pressure from declining industrial markets. Meanwhile, the bulls will argue that the company's valuation has a large enough margin of safety built in for some disappointment, provided the industrial economy is likely to improve in the second half. Here's hoping.
